Accidental Jocularity.

June 11, 2013

Q: What's the difference between a tire and a 25-percent annual return?
A: One's a Goodyear and the other is a really good year.

. . .
One man's loss is, quite literally, another man's gain.
So long as U.S. investors run for the exits at the sign of any market correction, no matter how slight, there will be opportunities for us to make hay. Per our most recent analysis, investors continue to fear pullbacks. All of them. Extraordinarily so.
One might liken it to a driver who had a bad accident. He may never fully recover, forever cringing at the least sign of trouble on the road.
Likewise, investors still reel from memories of the two recent bear markets. Every time the market drifts lower, they respond like a man who has been struck by lightning and sees storm clouds o'er the horizon.
Fear and opportunity are reluctant - albeit compatible, bedmates.
A weekly market survey taken last week showed that bearish sentiment among investors had jumped from 46 to 59 percent. Conversely, bullish sentiment has fallen from 54 to 41 percent. The 18-point spread between the two readings was the most negative reading since April.
Meanwhile, the American Association of Individual Investors (AAII) - the nation's largest organization of non-institutional investors - saw its bullish sentiment index sink from 36 to 29.5 percent in a week.
Having achieved a short-term peak of 49% at the market peak two weeks ago, the AAII bullish sentiment sank by nearly 20 percent - the largest two week sentiment decline since the bull market began in March 2009. It's as if the association, just having begun to feel secure in this markets veracity, felt violated and collectively muttered the safe word.
This because the market, long overdue for a correction of any sort, fell a measly five percent.
From October 2007 to March of 2009, the value of the S&P 500 dropped more than 56 percent. Stunning. But hardly the first time investors lost capital in dramatic fashion.
Since 1929, the S&P 500 has lost more than 20 percent of its value on 15 different occasions. That's once every five years. Each time, the market has rebounded.
Don't misinterpret, dear reader. Those investors who were utilizing the brokerage firms Buy-and-Hope methodology during the bear markets of 2000 and 2008 were hurt badly. Having watched their nest eggs collapse. Cut in half on two separate occasions within a seven-year period. Ouch, baby. Very ouch.
One begins to understand the post-traumatic stress disorder so prevalent amongst Main Street investors. It's the equivalent of a repetitively nightmarish sense of déjà vu. A sense of foreboding that leaves one feeling vulnerable to the market's next fifty percent drop. Which must be around the corner. Which keeps one from putting cash to work, or reallocating money into equities, even as bonds get roughed up like a preppy on the docks at dusk.
All of which has me feeling, well, groovy.
This market has rebounded. Stocks sit near all-time highs. Interest rates remain near historic lows as the Fed's policies have identified the central bank as the market's most enthusiastic cheerleader:
Baseball, barbecue, tasty apple pies.
Jumpstart America, rise market rise!
You can almost envision Bernanke with red, white and blue pompoms, right? Or, perhaps that just me... Anyways.
Even Nouriel Roubini has turned bullish. Roubini, the economist who gained notoriety under the moniker "Doctor Doom" for his cataclysmic predictions during 2008, has recently been heard to say that the stock market will rise for the next two years. Dr. Boom, er - Doom, that is, said that the Fed will not soon end its monetary easing policy. The economic recovery remains too tenuous. And so the rumors as to the death of this bull market have been vastly overstated.
Even as last week's jobs number came in at the expected level, the fact remains that this economy is not creating nearly enough jobs. Nor will it anytime soon.
In the end, the government - defined for the sake of this column as The White House and Congress, will serve to indefinitely extend the market's upward trajectory.
The market loves the Fed's ZIRP policy (Zero Interest Rate Policy), and will likely rise so long as ZIRP (and low inflation) remains intact. And ZIRP will likely remain intact so long as our elected bunglers in D.C. continue to stand in the way of a full economic recovery. And so long as said bunglers continue to engineer policies like Obamacare, minimum wage increases, tax increases and overly burdensome regulatory environments (it's easier to rob a bank than to start a business these days), then employers will not hire in mass. And our entrepreneurial class will remain frozen like Neolithic mosquitoes in the La Brea tar pits of this never-ending recession.
Which reinforces the idea that the market is forever on the precipice of another economically driven decline. Even as it appreciates heavenward.
Why such confidence?
We've long said that one could take the consensus forecasts of Main Street and Wall Street's top equity strategists, average them, and then do the exact opposite. More often than not, you'd get it right.
So, having noted Main Street's general pessimism, how much better is Wall Street faring in its 2013 predictions?
Merrill Lynch forecast that the S&P 500 "could reach a new all-time high of 1600 by year-end" 2013.
In March, Morgan Stanley raised its year-end 2013 S&P 500 forecast from 1,434 (?!) to 1,600.
As for UBS, they predicted that the S&P 500 would rocket upward by 4.8 percent to a year-end target of 1425.
Not bad. If one's earnings are tied to the size of one's miscalculations.
As of this writing, the S&P 500 sits at 1,644. I've got no problem with anyone making mistakes. In fact, I remind my wife of hers upon every anniversary. What I cannot tolerate are professionals who insist upon reading the tea leaves and providing their forecasts to a fawning public and then never admitting errors, regardless of how grievous. And regardless of how differently their own bets are placed.
What a joke. Which reminds me:
Q: What's the difference between your average meteorologist and a Wall Street equity strategist?
A: About $3 million per year in salary and bonuses.

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